Wave of Foreclosures Drives Prices Lower, Lures Buyers

By JAMES R. HAGERTY and KRIS HUDSON March 25, 2008;

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.
The ability of America's lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps -- and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.

On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.

The median price dropped 8.2% from a year earlier to $195,900, the biggest drop recorded by the Realtors in the current slump.
In some beaten-down markets, the price cuts have been stark. The Detroit Board of Realtors recently found that home sales in the city (excluding suburbs) in the first two months of this year jumped 48% from a year earlier, to 1,540. The average home price there sank 54% to about $22,000.

'Got to Move Things'

Banks and others holding foreclosed property have concluded "we've got to move things" and are finally willing to slash prices, says Thomas Lawler, a housing economist in Leesburg, Va.
The supply is piling up fast. Overall, the total number of lender-owned homes doubled last year but sales grew only 4.4%.

At the same time, the specialist firms that sell foreclosed homes for lenders say banks are sending them additional properties much faster than they can be sold. "They're coming in [at a rate of] two new properties for every sale," said Claudia Smith, vice president of operations for First American REO Outsourcing, which is handling roughly 8,000 foreclosed homes for lenders.

First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks, estimates that foreclosed properties held by lenders accounted for 493,000 of all homes on the market in January, up from 231,000 a year before. Properties like these represent roughly one of nine currently listed for sale nationwide, compared with a one-in-15 ratio a year earlier.

"This is both a crisis and an opportunity," says Rafael Cestero, a senior vice president at Enterprise Community Partners, Columbia, Md., a national nonprofit group that invests in housing for low-income people. Clusters of empty, foreclosed homes attract criminals and hurt neighborhoods by undercutting property values for everyone. Brenda Lawrence, mayor of Southfield, Mich., where about 3% of all single-family homes are in foreclosure, calls foreclosed homes "a cancer."

But foreclosures also can help bring prices in high-cost areas down to levels that are affordable to teachers, fire fighters and other middle-class buyers who may have been priced out of the market during the housing boom.

U.S. Rep. Barney Frank, a Massachusetts Democrat, recently announced plans for legislation to provide $10 billion of federal loans and grants to help local government and nonprofit groups buy and renovate vacant foreclosed homes. The homes would have to be sold or rented to people with low or moderate incomes.

The overabundance of foreclosed homes in the market is likely to push down home prices in much of the country for the next several years, says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm in Cleveland.

Off the Sidelines
Until recently, all of this distressed property has been encouraging potential buyers to stay on the sidelines in anticipation of lower prices later. But Lawrence Yun, chief economist of the National Association of Realtors, says the latest data show that sales are perking up in some areas where owners of foreclosed homes have become more aggressive about their pricing.
Prospects for the housing market also depend heavily on the job market. As measured by the S&P/Case-Shiller national index, home prices jumped 74% in the six years through 2006. During the same period, U.S. median household income rose just 15%. (Neither figure is adjusted for inflation.) That discrepancy made housing unaffordable for many Americans.

The home-price index already has come down about 10% from its peak in mid-2006. But prices might need to fall much further, some analysts say. A recent Credit Suisse report projects that average home prices have another 40% to fall in the Miami metropolitan area, 36% in Phoenix, 26% in Los Angeles and 20% in Las Vegas if they are to become more in line with income levels.
Lenders face dueling pressures when deciding how quickly to sell foreclosed properties. On the one hand, foreclosed homes tend to depreciate faster than occupied ones because they get less maintenance and quickly look forlorn. And the longer they sit unsold, the longer the lender must keep paying monthly expenses, including insurance and property taxes.

On the other hand, lenders must balance the pressure to clear their books with the fact that selling too quickly -- and at deep discounts -- could trigger big write-downs and devastate their quarterly results. "Somebody has to jump on the hand grenade," says Michael Cercone, a real-estate investor in Marblehead, Mass.

Lessons of S&L Crisis
William Seidman, a TV commentator and former bank regulator, served as chairman of Resolution Trust Corp., an agency created by Congress to sell the assets of failed savings and loans in the aftermath of that late-1980s financial crisis. "Our view was that we should sell [real estate] as quickly as possible," he says. Mr. Seidman advises today's sellers to take a similar approach.

In some cases, buyers are ready to act. Marc S. English, a beefy, 6-foot-4-inch Texan in ostrich-skin boots, walked into a private auction of 80 foreclosed homes at an Embassy Suites hotel near Dallas on March 9 and predicted that bargains would be scant due to the attendance of more than 1,000 rival bidders.

"If you can't make 20%, 25% off these deals, you're wasting your time," said Mr. English, who occasionally buys and sells homes to supplement his regular work with a commercial builder.
Yet Mr. English wound up buying two of the four homes he had scouted in advance. For instance, he agreed to pay mortgage investor Fannie Mae $37,000 for a three-bedroom, two-bathroom home in Fort Worth with a value of $69,600 in the county appraiser's records. After the auction, the lenders initially rejected his winning bids as too low. But a week later, they relented.
The fastest way to move foreclosed homes might be to sell in bulk to big investors, although that kind of transaction is highly unusual in the real-estate business. Nevertheless, some hedge-fund operators, including New York-based Paulson & Co., are considering whether to seek deals like these. There are big obstacles, however. One problem: Hedge funds aren't equipped to manage small properties scattered over large areas.

Another sticking point is price. Mary Coffin, an executive vice president who heads the loan-servicing business of Wells Fargo, says investors have approached her bank to discuss "fire sale" bulk purchases of homes, at as little as 20% to 30% of what the bank thinks the properties are worth.

"We're not there," Ms. Coffin says.
She thinks Wells can do better than that by selling homes one by one. Still, she says, Wells needs to prepare for the possibility of doing some bulk sales.

Nonprofit groups are angling to get in on the action. Enterprise Community Partners plans to provide financing for local organizations to buy foreclosed homes and renovate them for sale or rent. Enterprise's Mr. Cestero says the group expects to raise at least $50 million to $75 million initially from foundations, financial institutions and other sources for such programs in Cleveland, Dallas, New York, Baltimore and Columbus, Ohio.

Mr. Cestero says Enterprise Community Partners potentially could pay 50% to 70% of a property's estimated value. It has held talks with big lenders, although no deals have been reached.

The San Diego Reinvestment Task Force, a body set up by the city and county, has proposed to create a "land bank" that would buy foreclosed homes, repair them and make them available for sale or rent in order to prevent blight from engulfing hard-hit neighborhoods. Jim Bliesner, director of the task force, plans to seek funding from foundations and government agencies.
In the most dire cases, some lenders have teamed up with community-service groups essentially to donate foreclosed homes for use by low-income residents. In December, Fannie Mae began transferring 182 foreclosed homes, most of them in Detroit, to the Michigan State Housing Development Authority and the Michigan Land Bank Fast Track Authority. The agencies paid $32,000 for the entire group of 182 homes -- enough to cover title-processing charges on each home. Once the titles are cleared, the agencies will donate the properties, which range in value from $5,000 to $70,000, to Michigan municipalities, charities and housing programs.
One big problem for sellers is that mortgage lenders have severely tightened their terms, requiring larger down payments and better credit records. As a result, many people interested in buying foreclosed homes can't get loans.

Another hurdle is that the lenders responsible for selling the homes don't own all of them. That's because many mortgages are sold to investors in the form of securities; therefore, the investors in those securities actually own the homes. The trust agreements that create securities like these require lenders to show that they are getting the best price possible for the homes. That makes it tough to cut deals with potential buyers seeking huge discounts.
Among the big owners of foreclosed properties are government-sponsored mortgage investors Fannie Mae and Freddie Mac, along with the biggest lenders, Countrywide Financial Corp. and Wells Fargo. Fannie Mae owned 33,729 homes at the end of 2007, up 34% from a year earlier.
Another big seller is the Department of Housing and Urban Development, or HUD, which operates the Federal Housing Administration. The FHA insures banks and investors against losses on mortgages, and ends up owning foreclosed homes. The average time it takes to sell has grown to 196 days from 175 a year earlier, says Laurie Maggiano, a HUD official.
About 30% of HUD's homes are in Ohio and Michigan. In those states, HUD late last year began offering a $2,500 rebate to buyers. HUD also has programs that allow buyers to make down payments of as little as $100.

The $1 Home
HUD also has programs under which it sells homes at deep discounts, and sometimes for as little as $1, to local nonprofit developers who provide housing for low-income people. Ms. Maggiano says HUD is looking at ways of letting investors bid for large groups of homes.
The foreclosure crisis has been a blessing for companies that specialize in selling foreclosed homes, often under contract with lenders. One such firm, FIS Asset Management Solutions of Westminster, Colo., has doubled its staff in the past year to 260 and expects to sell 20,000 foreclosed homes this year, roughly twice last year's figure.

From a cubicle at FIS's headquarters, Bernadette Fleming sells, on average, one foreclosed home a day -- houses she never visits in person. She reads reports on their condition and the state of the local market, and confers with local real-estate agents. If a house doesn't sell, she re-evaluates every 30 days to see if price cuts are called for.

On March 10, Ms. Fleming weighed a low-ball offer on a three-bedroom, two-bathroom home in Pomona, Calif. The home had gone on the market four months ago for $329,000. Three price cuts later, it was at $269,900. Now, however, a would-be buyer was offering $210,000 plus help with closing costs.

In an email, the lender told Ms. Fleming to reject the offer -- but also decided to cut the asking price a bit more. "It's not in the worst shape," Ms. Fleming said of the property. "The landscaping needs attention. But we'll probably reduce the price again and get a contract on it."